In what is the largest ATM outsourcing deal in the country, Axis Bank has entered into an agreement with two third-party service providers to increase its ATM count to more than 9,000 within the next 18 months.

The country’s third-largest private sector lender has signed contracts with Prizm Payment Services and AGS Infotech to set up and manage 5,000 ATMs on a purely variable model, according to a person with knowledge of the development.

Axis Bank had 4,293 ATMs as on March 31, 2010.

Prizm will set up 3,500 ATMs while AGS Infotech will set up 1,500 ATMs.

Since it’s a fully outsourced deal, the bank will not incur capital expenditure. The ATMs will be owned and managed by the two service providers. Axis Bank will only be responsible for cash settlement and will pay the service providers a fee per transaction.

The fee for each cash withdrawal will be Rs 13-15, while that for a balance enquiry will be Rs 3-5. For third-party transactions, in which a non-Axis Bank customer uses the ATMs, charges over and above the fixed fee will be split between the bank and the service provider.

State Bank of India has the largest ATM network in the country with 18,246 units as on December 31, 2009. The country’s largest private sector lender, ICICI Bank, comes next with 5,219 ATMs as on March 31. HDFC Bank’s ATM count is 4,232.

The deal could see Axis Bank’s ATM network become the second-largest in the country, said the person quoted earlier.

After the Reserve Bank of India (RBI) asked banks to stop charging customers for cash withdrawals, setting up and managing ATMs has become a costly affair for banks. Whenever a customer uses an ATM of another bank, his bank has to pay the bank whose ATM is used an interchange fee of about Rs 18.

In April last year, banks, following a directive from RBI, stopped charging even third-party customers for ATM withdrawals. However, in October last year, banks were permitted to charge customers who had used their quota of five free third-party transactions per month.

More and more banks are looking to avoid the expense and headache of setting up and managing ATMs by following an outsourcing model.

Last year, State Bank of India entered into an agreement with C-Edge for outsourcing ATMs. Smaller banks such as Yes Bank and Dhanlaxmi Bank have also adopted this model.

“While RBI has given banks some respite from the free-ATM rule, we think it’s just a matter of time before ATMs become free again. This will increase ATM expenses for banks,” said a senior executive of a private sector bank.